Warren Buffett who many in the industry consider being the best value investor of all time and a hero to many investors experienced an annus horribilus in 2018.
Warren Buffett, with over 50 years of investing, has more than doubled the overall stock market’s return, producing average annual gains of nearly 21% compared to the S&P 500’s 10%.

“Warren Buffett’s worst year ever”

Wall Street Journal

But Warren Buffett’s Hathaway $25.4 billion loss last year also mirrors that 10 years ago where the billionaire investors made an unprecedented admission in his 2009 financial report.

Back then Warren Buffett admitted to making ‘dumb’ mistakes in 2008 which was Berkshire’s worst year.

In 2008 Warren Buffett told his shareholders: “During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me.” He had an 89% loss by the end of 2008. … In fact, two major Irish banks were nationalized by the end of the crisis.

Warren Buffett’s Hathaway $25.4 billion loss again in 2018 have got some in the industry wondering what has happened to the man who is nicknamed the “Oracle of Omaha”

“During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me”(He had an 89% loss by the end of 2008)

Warren Buffett

New accounting rules requiring mark-to-market change have been blamed for Warren Buffett’s Hathaway $25.4 billion loss in the fourth quarter of 2018

The latest Hathaway letter to shareholders writes.

“A new GAAP rule requires us to include that last item in earnings. As I emphasized in the 2017 annual report, neither Berkshire’s Vice Chairman, Charlie Munger, nor I believe that rule to be sensible. Rather, both of us have consistently thought that at Berkshire this mark-to-market change would produce what I described as “wild and capricious swings in our bottom line”.

So mark-to-market change in accounting rules has been pointed to as the main reason for Warren Buffett’s Hathaway $25.4 billion loss.

“The accuracy of that prediction can be suggested by our quarterly results during 2018. In the first and fourth quarters, we reported GAAP losses of $1.1 billion and $25.4 billion respectively,” writes Hathaway.

“Wild and capricious swings” in the bottom line means roller-coaster profits and losses in varying quarters. “In the second and third quarters, were reported profits of $12 billion and $18.5 billion. In complete contrast to these gyrations, the many businesses that Berkshire owns delivered consistent and satisfactory operating earnings in all quarters”, writes Hathaway.

“For the year, those earnings exceeded their 2016 high of $17.6 billion by 41%” added Hathaway.

“Wide swings in our quarterly GAAP earnings will inevitably continue. That’s because our huge equity portfolio – valued at nearly $173 billion at the end of 2018 – will often experience one-day price fluctuations of $2billion or more, all of which the new rule says must be dropped immediately to our bottom line,” wrote Hathaway.

What’s more, in volatile markets the new accounting rules mean that profit and losses can swing by billions of dollars in just a few days.

“Indeed, in the fourth quarter, a period of high volatility in stock prices, we experienced several days with a “profit” or “loss” of more than $4 billion,” wrote Hathaway.

Write-downs of bad investments was another reason for Warren Buffett’s Hathaway $25.4 billion loss in the final quarter of 2018

In a recent interview with CNBC Warren Buffett said he overpaid for the companies stocks.

“I was wrong in a couple of ways about Kraft Heinz” Buffett told CNBC. “We overpaid for Kraft”. “It’s still a wonderful business in that it uses about $7 billion of tangible assets and earns $6 billion pretax on that,” Buffett tells CNBC. “But we, and certain predecessors, we paid $100 billion in tangible assets. So for us, it has to earn $107 billion, not just the $7 billion that the business employs,” said Warren Buffett.

Warren Buffett said he has no intention of selling his stake in the company.

“There could be too much capital sloshing around the financial system chasing few companies with solid earnings”

Could Warren Buffett’s Hathaway $25.4 billion loss be the reality of investing in a post-quantitative easing (QE) world?

There could be too much capital sloshing around the financial system chasing few companies with solid earnings. The central bank’s QE to infinity has created hyperinflation in asset prices and that could be making traditionally valued investing precarious.

Warren Buffett’s Hathaway $25.4 billion loss does not make him stand alone as the only, once all time great investor to fall on his sword in this brave new world of investing. Also the one time, Bond King Bill Gross has been dethroned.

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